Dog Days of August Bring Economic Calm but No Relief

Weakness, weakness almost everywhere with only the odd pocket of resilience. That's been the state of the global economy for a while, and this is unlikely to be the week when things change for the better.

Consumers and businesses are hanging fire because of doubts over U.S. tax and spending policies, how aggressively Beijing will respond to slowing Chinese growth and, above all, how the euro zone's debt and banking crisis will unfold.

"All of the data releases are still affected by the environment of uncertainty which is holding back activity across Europe," said Peter Westaway, chief economist for Europe at Vanguard Asset Management in London.

And with the dog days of August upon us, the next decisive moves on the euro front are probably three or four weeks away.

"While the resolution of the sovereign debt crisis is still unclear, it's going to be very difficult for the economy to pick up," Westaway said.

Figures on Tuesday are expected to show that the 17-nation euro area economy shrank by 0.2 percent in the second quarter.

Germany, the bloc's biggest economy, is forecast to have eked out 0.2 percent growth, but that may be cold comfort.

The more timely ZEW survey for July is projected to show a downturn in both economic sentiment and current conditions.

The government said the eurozone crisis was making companies cautious. "The outlook for the German economy is therefore cautious and carries significant risks," the economy ministry said in a blunt statement released ahead of the data.

Markets have taken heart from a promise by Mario Draghi, the president of the European Central Bank, to do whatever it takes to preserve the euro.

The betting - certainly the hope - is that Spain will start the ball rolling next month by asking the eurozone's rescue fund to buy some of its bonds at auction, a step that analysts expect would be followed by secondary-market purchases by the ECB.

Nevertheless, confidence is so fragile, and the end-game still so far off, that Bank of America Merrill Lynch now expects the eurozone to shrink 0.7 percent both this year and next. The 2012 forecast is unchanged, but previously the bank had pencilled in a flat 2013.

ASIA STRUGGLES

The festering euro crisis continues to rub off in Asia.

After poor July export data from Taiwan and South Korea, China's shipments to the European Union last month dropped 16 percent last month from a year earlier. India's 1.8 percent drop in industrial production in the year to June was "shocking", according to Robert Prior-Wandesforde with Credit Suisse in Singapore.

Japan is likely to report second-quarter GDP growth on Monday of 0.6 percent - very respectable, but half the rate of the first three months of the year. With chill winds blowing in from Europe, weakness in indicators such as machinery orders suggest the slowdown is likely to intensify.

"We cannot ignore the possibility that the deterioration in the economic situation overseas will affect corporate confidence in Japan, and thus have an impact on the domestic economy," Masayuki Kichikawa, BOA Merrill's chief economist for Japan, said in a report.

In the United States, worries are mounting that a spike in food prices caused by a severe drought in the Midwest will squeeze consumers' disposable incomes.

For now, though, economists expect Tuesday's retail sales report for July to show a 0.2 percent rise. That would be in keeping with other data recently pointing to a recovery that, while very modest by U.S. standards, is something Europe can only dream of.

J.P. Morgan reckons the U.S. is on track for annualised growth this quarter of 1.5 percent - a touch weaker than the pace in the second quarter, which the bank now thinks was 1.7 percent, compared with the government's initial estimate of 1.5 percent. For its part, Nomura has raised its third-quarter GDP tracking estimate to 1.9 percent from 1.8 percent.

Westaway with Vanguard described U.S. growth as steady rather than sparkling; the big risk was that the looming year-end fiscal cliff of automatic spending cuts and tax rises could cause activity to stall.

"Of the three global shocks that everyone is worrying about - Europe, China and the U.S. - the U.S. is probably the most positive," Westaway said. "But that's not saying much."